Honey, they shrunk the IRS

Congress will spend a trillion dollars more than it levies this year, so how do Washington’s politicians respond to the 11th consecutive year of federal budgets in red ink? They plan to shrink the IRS.

Go figure. Cutting the IRS budget by more than 5 percent in real terms makes as much sense as a hospital firing surgeons or a car dealer laying off salespeople when customers fill the showroom.

Shrinking the IRS makes sense if you believe government is too big and that cutting everywhere is the best way to shrink government. But this is the staff that generates revenue, and there is easy money to be made.

Congress should listen to the national taxpayer advocate, a position it created to make sure taxpayers had a voice in how the IRS operates. In her annual report, released last week, advocate Nina Olson said Congress needed to “ensure that the IRS continues to be effective, either by reducing the IRS’ workload or by providing adequate funding to enable it to accomplish its assigned mission.”

Instead of cutting, we should be expanding the revenue-generating staff because there is plenty of tax money to be had, even in this awful economy.

IRS data show that auditors assigned to the 14,000 or so largest corporations found $9,354 of additional tax owed for every hour spent testing tax returns in the 2009 fiscal year. The highest-paid IRS auditors make $71 an hour. Based on a 2,080-hour work year, that works out to around $19 million of lost revenue annually for every senior corporate auditor position cut from the payroll.

WHY CUT?

It makes no economic sense to trim the ranks of auditors who generate more than a hundred times their annual salaries. Run a business that way and you go broke.

So why would President Barack Obama and Congress cut the IRS budget? Their actions illuminate the rise of corporate power and values, and the diminishing voice of Joe Sixpack, thanks partly to how we finance election campaigns. Then there is the growing army of corporate lobbyists and the Supreme Court’s decision in Citizens United, which allows corporations (and unions) to spend all they can afford on influencing elections.

Keep in mind the IRS costs just a half penny for each dollar of tax collected. Its proposed $11.8 billion budget would be less than the Agriculture Department spends each month.

If the IRS budget is cut, the losers will be workers and ordinary investors, who will find it harder to get their questions answered and their problems resolved by the agency. On the whole, these people do not cheat on their taxes because their incomes are easily checked — through reports by employers, mortgage banks and others. Under a law taking effect in stages between last year and next, brokerages must report the cost basis of securities. This change will reduce capital gains cheating.

TAX CHEATS

The winners will be tax cheats among sole proprietors and other business owners, who are subject to less verification. The latest IRS tax gap report, issued Jan. 6, estimates that just one percent of wages escapes tax, while 56 percent of “amounts subject to little or no” verification do so.

America’s biggest corporations, those with more than $250 million in assets, also may escape some tax if the IRS budget is cut. These nearly 14,000 companies pay about 86 percent of corporate income taxes.

Audits of these big firms were down even without a budget cut. And audits have become far more complicated, partly because Congress changed the tax code more than once a day on average from 2001 through 2010, Olson reported.

Two decades ago, when the economy was a third smaller, the IRS staff numbered about 118,000. Now it numbers 95,000 and is on the way to about 90,000. The likelihood of a big company being audited has plummeted 50 percentage points from 72 percent in 1990 to 22 percent in 2010.

Big company audits are now limited to specific issues known to the companies in advance, not unlike when cops tip off owners of favored gambling dens before a raid. Each audit also begins with an “estimated time to completion.” Working auditors tell me this is really a hard deadline that allows companies to run out the clock with delays in producing documents.

Whether you like the corporate income tax or think it is an abomination, failing to enforce it with the same rigor as taxes on wage earners and most investors is indefensible on economic, budget deficit and moral grounds.

IRS budget cuts worsen budget deficits and send a corrosive signal that only chumps file honest tax returns. So you have a choice. Do nothing and suffer the consequences or call your congressman, senators and the White House — today — and then vote in politicians who support, rather than undermine, tax law enforcement.

No wonder there’s a huge deficit! I think we have the same problem in the UK, but to a lesser extent (I can usually get through to the UK’s equivalent of the IRS, HMRC; and they are usually quite helpful when I do; and I occasionally get phone-calls from them to clarify aspects of my tax returns.)

We’re beginning to see anecdotal evidence of increasing numbers of large corporations deliberately cheating on their tax returns to start with (in a barely “legal” way if they can); and waiting for the tax authorities to spot the problem before negotiating their bill down as a “good faith” mistake…
http://www.bbc.co.uk/news/business-16253 205

If there’s any question over the correct interpretation of a certain tax law, why don’t the big corporations get on the telephone at the outset to clarify the matter immediately, the same way I do for my own tiny one-man business? Do their boards and shareholders demand this tax “economisation” behaviour?

It works the same way in America. Deliberately under report your tax burden, wait for the unlikely audit, then negotiate some settlement figure.

That’s the policy for corporations that can afford lawyers, at least. For the average guy, the IRS will hound you relentlessly. I expect that this trend will be exacerbated as the IRS looks for more non-compliance money with their reduced resources.

Interesting article. Do we really want to become the next Greece or Italy? Failure to enforce their tax laws effectively is a major part of the fiscal crises in those countries. Budget cuts to the IRS are a big step in the direction of fiscal irresponsibility.

WOW! He writes, “this is the staff that generates revenue, and there is easy money to be made.”

They “generate” revenue? What product do they make? “Easy money”? That’s quite the Robin Hood philosophy. No, they do not generate revenue: they transfer money from the people to the Congress so that Congress can spend it.

He also writes, “Shrinking the IRS makes sense if you believe government is too big and that cutting everywhere is the best way to shrink government.”

EXACTLY. That’s what I think, along with more and more Americans every day. I need my money that I worked for more than Congress does.

The tax code is overly-complicated and overly-burdensome. We waste way too much time and money trying to understand and conform to this system. A better idea would be to get rid of the income tax and instead use a progressive consumption tax. The government would save a ton of money by eliminating the IRS, citizens would save time and money by not having to file taxes and the new system would encourage savings, which we need in this country.

The IRS “taxpayer advocate” says that the IRS’s workload should be reduced or it should get more funding – this is like saying the sky is blue – every government agency know to humankind has always said the same thing – not a single one has ever said give us more work and less funding.

While many will agree that our taxes are overly complex, The wildly bloated incomes of the top tenth of the top one percent indicate a broken system where their accountants beat our accountants. Who are we? We are the American citizens and taxpayers who are indenturing the next generation with unpaid taxes for overseas wars that are not paid for.

Those 400 families that make literally billions each year receive far more than reward for a job well done. They receive money used for social control which is evident in the spending of super pacs.

@goldstockbull,
no government operates without a tax enforcement agency.

It was the lack of one that caused the first American republic to fail, resulting in this, the second American republic in which the very first power we grant our Congress is a virtually unlimited power to tax (Article 1, Section 8). The Framers understood that taxation was the core of democracy and without taxes there is no wealth and without taxes the liberties of the people could not endure.

My previous column http://blogs.reuters.com/david-cay-johns ton/2012/01/06/time-to-junk-income-taxes / showed one way that we simplify corporate income tax law by having companies keep one set of books instead of one for shareholders and another for the IRS. I also asked why, given modern technology, 120 million of 140 million taxpayers need to file returns. Most countries do not require income tax filing and only minor changes in law would be needed for us to do the same for most people assuming we keep the income tax.

In future columns I will show others ways we could make the tax system simpler and easier to comply with and explore the political reasons Congress has not been willing to do this.

@jambrrytay,

the words you put in quote marks do not appear in my column.

What I did write was about principled and equal enforcement of the law:

“Whether you like the corporate income tax or think it is an abomination, failing to enforce it with the same rigor as taxes on wage earners and most investors is indefensible on economic, budget deficit and moral grounds.”

I hope my readers above, and others who post here, comment on the issue of UNequal enforcement of the law.

Our Congress enacted laws that hold wage earners (including me) to one standard, but business owners (including me) and corporations (I chair a tiny one) to a different one with little or no independent verification, making audits crucial to the integrity of the system.

This is really just a continuation of the defunding of government as started during the Clinton administration. There are many books about defunding the government. I read “The Wrecking Crew” by Thomas Frank. This defunding is happening at all levels of government and most people with whom I speak do not believe anything I tell them about the philosophy of defunding.

Good column David. But why not propose some solutions to the IRS dilemma?

Wouldn’t it make sense to finance an “attack team” within the IRS so as to marshall the scarce resources? This could be done through the IRS whistleblower office which gets the benefit of insiders knowledge to go after big-time tax cheats. This is the only way forward given the increased sophistication and industrial scale tax avoidance/evasion that we are witnessing.

Perhaps David might champion that particular cause, if he thinks it worthwhile?

@Jaham
It is very difficult to compare the IRS to private industry because their motives are entirely different. Yes less may lead to efficiencies at a car dealership or a hospital but that is because their profit goal is focused on rates of returns rather than overall profit in nominal dollars. The IRS is not a private entity with a focus on generating a rate of return but rather has a goal that is consistent with the idea of residual returns meaning that it wishes to maximize the nominal dollars it takes in less the costs of bringing in those dollars. Thus as the article claims if an auditor has the ability to bring in more money than it costs to pay that auditor than it is good for the IRS. The term efficient is too vague and suggests that government entities and private corporations operate the same way. In this case I agree with the article in that additional auditor hours will lead to a higher residual income for the IRS, not that cutting jobs at the IRS will lead to “efficiencies”

@Stacylaw
Yes, I agree congress does have its issues when it comes to resource allocation and effective spending, however allowing people to escape taxation is not a solution, as a matter of fact it even hurts those who play by the rules. If you are unhappy with how congress spends that money than fight for how it should be spent, and not about who should pay. Are you unhappy with the amount of money that the government is taking away from you or rather are you upset with what you are getting for that money. I believe that the point of this article is focusing on correcting the way in which the government collects taxes and who pays them which often draws a lot of criticism from people who are actually unhappy with what they receive from those taxes, not the idea of taxation as a whole.